20 Ways to Minimize Taxes on Retirement Withdrawals
Strategic planning can significantly reduce taxes on retirement withdrawals, helping you keep more of your hard-earned savings.
- Chris Graciano
- 4 min read
If you don’t handle your retirement withdrawal taxes correctly, they can reduce your savings. You may maximize your retirement income and reduce your tax liability with the appropriate tactics. These are 20 clever strategies to lower taxes and extend the life of your retirement savings.
1. Delay Social Security Benefits
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Waiting to claim Social Security until age 70 increases your monthly benefit and can reduce taxable income in earlier retirement years. Since up to 85% of benefits may be taxed based on income, delaying withdrawals can help keep you in a lower tax bracket.
2. Withdraw from Taxable Accounts First
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Using money from taxable investment accounts before tapping retirement accounts allows tax-deferred funds to continue growing. This strategy also helps manage required minimum distributions (RMDs) later.
3. Convert Traditional IRAs to Roth IRAs
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A Roth conversion shifts funds from a tax-deferred account to a tax-free account, avoiding taxes on future withdrawals. Converting during low-income years minimizes tax consequences.
4. Take Advantage of the Standard Deduction
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By carefully timing withdrawals, you can stay within the standard deduction limit and avoid unnecessary taxes. For 2024, the deduction is $14,600 for single filers and $29,200 for married couples.
5. Use Qualified Charitable Distributions (QCDs)
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Donating directly from an IRA to a charity after age 70.5 allows tax-free giving while satisfying RMDs. This reduces taxable income while supporting a good cause.
6. Manage Required Minimum Distributions (RMDs) Strategically
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Once RMDs begin at age 73, planning withdrawals carefully can prevent significant tax hits. Taking smaller withdrawals earlier can reduce the impact later.
7. Relocate to a Tax-Friendly State
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Some states don’t tax retirement income, making relocation a smart way to reduce tax burdens. Popular tax-friendly states include Florida, Texas, and Nevada.
8. Utilize the Tax Bracket Sweet Spot
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You can minimize overall taxes by strategically withdrawing enough each year to stay within a lower tax bracket. This is especially useful for those in the 10% or 12% bracket.
9. Harvest Investment Losses
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Selling losing investments to offset taxable gains can lower your overall tax bill. This strategy, known as tax-loss harvesting, can help reduce capital gains taxes.
10. Withdraw Roth Contributions Before Earnings
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Roth IRA contributions (but not earnings) can be withdrawn tax-free at any time. Using these funds first can help avoid taxable withdrawals from other accounts.
11. Take Advantage of the Saver’s Credit
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Low to moderate-income retirees can qualify for a tax credit by making retirement contributions. This credit can be worth up to $2,000 for married couples.
12. Keep Income Below Medicare Surcharge Thresholds
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Higher-income retirees pay extra Medicare premiums, known as IRMAA surcharges. Keeping modified adjusted gross income (MAGI) below certain limits helps avoid these extra costs.
13. Consider a Health Savings Account (HSA)
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HSAs offer tax-free withdrawals for medical expenses, making them a great retirement tool. If funded early, they can cover healthcare costs without increasing taxable income.
14. Split Withdrawals Over Multiple Years
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Large lump-sum withdrawals can push retirees into higher tax brackets. Spreading distributions over several years smooths tax liabilities.
15. Delay 401(k) Withdrawals If Still Working
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If you’re still employed past the age of 73 and don’t own 5% or more of the company, you may delay RMDs from your current 401(k). This allows continued tax-deferred growth while lowering immediate tax obligations.
16. Withdraw Based on the 4% Rule
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A structured withdrawal plan, such as the 4% rule, ensures steady income while keeping taxes manageable. This method balances withdrawals with portfolio longevity.
17. Use Annuities for Tax Deferral
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Certain annuities allow tax-deferred growth, delaying taxable income until needed. This can help manage income levels in retirement.
18. Take Out Loans Instead of Withdrawals
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For short-term cash needs, borrowing against assets instead of withdrawing can prevent taxable income spikes. Home equity loans or cash-value life insurance policies offer tax-free loan options.
19. Time Capital Gains Wisely
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Selling assets in years with lower income ensures lower capital gains taxes. Long-term holdings (over one year) qualify for reduced tax rates.
20. Work with a Tax Professional
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Tax laws change frequently, and a professional can help navigate complex rules. A financial advisor can identify personalized strategies to lower taxes.